The fighting in Ukraine continues, as Russia’s invasion reaches its anniversary. Despite a series of successful Ukrainian counterattacks last year, the war has descended into grim stalemate, with conditions in eastern Ukraine reminiscent of First World War trench warfare.
On the home front, however, the Russian president Vladimir Putin has suffered a definitive loss: he has gambled away the financial leverage his regime held over Europe’s energy supply. Back in summer 2022, Europe’s winter energy supply looked worryingly insecure. The flurry of targeted sanctions by Nato member states against Russia had led Putin to retaliate by squeezing Russia’s gas exports to Europe.
This put a huge strain on the European gas market. By September, the continent was paying around the same amount for imports as it had done the previous summer, while receiving 75 per cent less gas. European Union bans on Russian coal imports and caps on crude and refined oil increased the pressure.
There was concern that European nations would not be able to keep the lights and heating on over the winter. In France, the Parisian authorities switched the Eiffel Tower’s lights off an hour earlier and made municipal pools 1°C cooler. Germany banned illuminated advertising hoardings and ruled that radiators in corridors, foyers, entrances of public buildings be switched off.
Russia supplied around 40 per cent of EU gas in 2021, and the Union relies on gas for around 30 per cent of its heating, and for around a quarter of its electricity. To make matters worse, 2022 saw a steep drop in France’s nuclear power output, as a combination of planned maintenance shutdowns and unplanned shortages of cooling water forced power operators to cut electricity generation by half between January and September 2022.
France typically relies on nuclear for 70 per cent of total electricity supplies, but the nuclear outages forced it to increase gas imports to record levels, and the country switched from being a net power exporter to a net importer.
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Yet at the start of this month, the EU has more gas in storage than it did at the same point in 2022. Through a combination of effective planning and luck, Europe has been able to defeat Russia in the 2022-23 winter energy war.
Unseasonably warm weather was key to Europe’s success. The third-warmest autumn on record postponed the need to switch heating on, allowing utilities to fill their gas storage facilities up to the limit. While the 2022-23 European winter season is also looking like one of the warmest winters since documentating began. In January, temperature records were broken across Europe, with the mercury in many cities across central and eastern Europe hitting close to or above 20°C, as opposed to the sub-zero temperatures typical for this time of year.
Despite the weather Europeans are still turning on their central heating, so significant demand for gas persists. Yet a lower energy demand than usual from China has allowed Europe to dramatically increase shipments of liquefied natural gas (LNG) from countries like the US and Qatar. This has been put down to weak Chinese economic performance because of the country’s “zero-Covid” policy, its switch from gas to coal or oil as a result of high gas prices, and the rising supply of pipeline gas from Russia to China – from 10 billion cubic metres in 2021 to 15 billion in 2022.
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In 2022, Europe boosted its LNG imports by 60 per cent on the previous year, with two thirds of the rise supplied by the US. The continent also benefited from its ability to pay more for gas than many other countries in the world are willing to pay, as well as smooth operations at American LNG facilities, which were able to run at almost full capacity.
The world’s third-largest gas exporter, Norway, was also able to ramp up gas deliveries by around 8 per cent in 2022 compared with 2021. By December, Norway was supplying more than 40 per cent of the gas consumed in Germany, the EU’s largest gas consumer.
The end of 2022 saw a slight recovery in France’s nuclear power, with generation rising month-on-month in the last four months of the year as reactors came back online.
While Europe has had success, the economic picture in Russia is bleak. Preliminary budget data from its government shows the country struggling to balance its books because of plunging energy revenues – which could prevent it from adequately funding the military campaign. Estimates suggest Russia's federal budget deficit soared to $24bn (1.76trn rubles) in January 2023, compared with a budget surplus last January, as state oil and gas revenues plunged by 46.4 per cent.
Not only are gas flows to Europe significantly down, but Western price caps on Russian oil that came in last December are also having a major impact. The average price of the Urals Russian benchmark oil price stood at $49.48 per barrel in January, compared with a global average price of around $80, as a result of Russia being forced to sell its oil to non-Western markets at a discounted rate.
But Europe is not out of the woods. Already, the talk in EU policy circles is about next winter. According to the Belgian economic policy research think tank Bruegel, managing European gas supplies “will remain a tightrope walk for the next two years”.
There is already an EU target to reduce natural gas demand by 15 per cent between 1 August 2022 and 31 March 2023, compared with the average in the same period over the previous five years. Yet, as Bruegel advises: “Policymakers must continue to take strong and decisive action,” with a strategy including deployment of renewables, electrification of heating, energy efficiency and campaigns to inform citizens about the importance of saving energy.
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